Time for a New Direction in Local Development

July 23, 2012

by Matthew Hisrich

In 2008, a large manufacturer in my county shuttered its doors and the head of the local economic-development group resigned. At that time, there were calls to re-evaluate our approach to economic development. Fast forward four years and once again we find ourselves in a similar situation.

The question stands before us again: Will we continue to regard economic development as something best left to publicly-funded agencies run by highly-paid “experts,” or will we as a community instead engage in a serious discussion about other alternatives?

In the case of most of these semi-official Economic Development Corporations (EDCs), it begins by siphoning dollars out of local economies through the Economic Development Income Tax (EDIT) to fund programs and staff. The rationale is that these offices will work with local officials to offer targeted tax incentives to certain industries.

But as Michael LaFaive of the Michigan-based Mackinac Center for Public Policy observes, this model is based on four flawed assumptions:

Bureaucrats are better equipped to foster wealth and job creation better than local citizens.

The efforts of trade associations, industry groups, law and accounting firms, universities and a host of specialty consultants are insufficient to provide businesses with the expertise they need.

Selective tax credits and subsidies are more effective than across-the-board tax relief.

Public officials will be rewarded for “doing something” through intervention rather than simply removing barriers to the free exercise of the economy.

This model produces an overall tax burden for businesses and individuals higher than it would otherwise have to be. This is important because a higher tax burden translates into lower economic growth.

“When taxes go up, the growth in the income of taxpayers might decline,” notes an economist, Richard Vedder. In fact, several decades of studies by economists confirm the proposition that the higher the level of taxation, the lower the rate of economic growth, holding non-tax factors constant” (emphasis original). Vedder also observes that this the economic impact varies depending on the tax imposed. “The evidence is striking that the most harmful major tax is the individual income tax.”

The departure of the chief of my county’s economic-development group provided my community with an opportunity to rethink this model. And throughout the state, similar groups have the capacity to transform themselves from agents of corporate welfare into catalysts for change. They can begin to foster a culture of genuinely consistent and uniform support for economic vitality by taking the following steps:

First, seriously consider scaling back the size of your EDC and the EDIT necessary to support it. Any successes agencies achieve must be balanced against the drain they represent on the overall economic health of the area and the damaging culture created by granting special treatment to some business ventures and not others.

Second, EDCs should become advocates of all business growth and entrepreneurship rather than focusing on targeted investments. This means encouraging state and local governments to streamline services, reduce overhead, and in addition consider contracting out or privatizing where appropriate.

Third, the EDC should follow these efforts up with proposals to lower the tax burden of your county residents and businesses across the board. Dollars taken out of the hands of private citizens are dollars that are removed from the hands of those who create economic wealth and are in the best position to determine where and how resources should be allocated to maximize growth and prosperity in the region.

Finally, it is time for the experiment with the EDCs and the local Chambers of Commerce to end. This ill-conceived hybrid reeks of cronyism in a field that already raises too many questions about special treatment to favored industries.

Your local economic-development group should view these moves as central to its mission and as part of an overall effort to create a local enterprise zone — and local citizens should drive this transition.

My county is not unlike many in Indiana that sit on the brink of an important decision about how they will compete not only with their regional neighbors but also in an increasingly competitive global marketplace. We will not succeed if we continue to pursue the same broken model we have for so long. Now is the time to shift gears, to change the perception of local government, and to create an environment where investment is welcomed from within and without.

Matthew Hisrich, an adjunct scholar of the Indiana Policy Review Foundation living in Richmond, holds a Masters of Divinity degree from the Earlham School of Religion and has conducted public-policy research in Indiana and Ohio. He currently works for the Indiana Yearly Meeting of Friends (Quaker), where he administers a grant program for pastors.

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